Abstract
Recent literature has debated possible adverse impacts of aid volatility on a country's economic performance. Our paper adds to this literature in three ways: First it tests the validity of the aid volatility and growth relationship from various aspects: across time horizons, by sources of aid, and by aid volatility interactions with country characteristics. Second, it investigates the relationship by the level of aid absorption and spending. Third, when examining the relationship between IDA aid volatility and growth, it isolates IDA aid volatility due to the recipient country's performance from that due to other sources. Our findings suggest that, in the long run, on average, aid volatility is negatively correlated with real economic growth. But the relationship is not even. It is stronger for sub-Saharan African countries than for other regions and it is not present in middle income countries or countries with strong institutions.
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